Question

A best efforts arrangement is an agreement for the sale of securities in which the investment bank guarantees the sale by purchasing the securities from the issuer, thus agreeing to bear any risks involved in the transaction.

Answer 1

Best efforts agreement is entered between Investment banker and the client, who is looking to dispose securities in either public market or private market transaction. Best efforts indicates that Investment Banker will put all possible effort to sell the entire securities, however it doesn't guarantee the complete sale.

Best efforts acts as a prudent risk management tool for an Investment Banker. As there is no explicit guarantee about the complete sale of securities in the transaction, usually a fee as percentage of the deal value is charged to the client. If Investment Banker sells more, they earn more fees.

Investment bankers handle securities issues depending on client profile and the risk involved in transaction. Typically high profile transactions like Facebook IPO in 2012 are firm committed transactions where Investment Banker enters an agreement fully dispose of securities to public market. Morgan Stanley acted as the lead underwriter to the Facebook IPO.